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#798785 - 08/20/07 08:13 PM Force placed flood coverage
banker-12 Offline
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We force placed flood insurance on a loan at loan origination, (prior notice was given to the customer). The policy is coming up for renewal. Do we need to give the customer the 45 day notice prior to renewing the policy or can we just renew the force place insurance automatically.

Please advise

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#798790 - 08/20/07 08:15 PM Re: Force placed flood coverage banker-12
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#799158 - 08/21/07 01:53 PM Re: Force placed flood coverage Cowboys Fan
Glutes Offline
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banker-12, one thing that sticks out to me is your statement that you forced placed flood insurance on a loan at loan origination.

My understanding of force placement is that it's a last resort option and option available to you during the term of the loan when you've discovered that there is a lack of flood coverage or adequate flood coverage on an existing loan or when an existing policy has expired and hasn't been renewed. It should be preceded by a 45 day notice.

It is not supposed to be an option at loan origination. Instead, if you don't have flood insurance or adequate flood insurance at loan origination, you are not to make the loan.

Here is some verbiage from FEMA's Mandatory Purchase Guidelines:

"By enacting 42 U.S.C. 4012a(e)(2), Congress intended lenders to have clear authority to force place; under certain circumstances, they are obligated to force place. The force placement of coverage is designed for use at any time during the term of a loan in uninsured and under-insured situations; it is not intended for use at loan origination. If a borrower refuses to obtain flood coverage as a condition of obtaining a loan, the loan is deficient and is not to be made."

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#799159 - 08/21/07 01:53 PM Re: Force placed flood coverage banker-12
LoisLane Offline
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Originally Posted By: banker-12
We force placed flood insurance on a loan at loan origination


When you say origination, do you mean the loan closing? My understanding of the flood requirements is that you can't make the loan if the borrower won't give you evidence of flood insurance at the loan closing (i.e. force-placement can't be used).
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#799426 - 08/21/07 05:12 PM Re: Force placed flood coverage Glutes
banker-12 Offline
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Thanks for the info. Actually I meant at loan closing, but this policy was already in place from a prior loan. This new loan paid of the other loan which already had the force placed insurance.

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#799447 - 08/21/07 05:24 PM Re: Force placed flood coverage banker-12
Dan Persfull Offline
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You should not have refinanced the loan. You still closed a loan using force placed insurance.
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#799568 - 08/21/07 06:35 PM Re: Force placed flood coverage Dan Persfull
banker-12 Offline
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Oh no, that's right. Thanks,

I have another question in relation to flood insurance. Can we use an in house evaluation to determine the amount of coverage to insure if we don't have an appraisal.

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#799730 - 08/21/07 08:37 PM Re: Force placed flood coverage banker-12
Dan Persfull Offline
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Yes, provided the evaluation is a "true" evaluation.
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#799808 - 08/21/07 09:54 PM Re: Force placed flood coverage Dan Persfull
banker-12 Offline
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Do we follow the same coverage calculations for a townhome like we do a condo? I have a loan for $264,000, the insurance is for $665,000. There are 24 units, so I took the 24 x $250,000 = $6,000,000 to give me the insurance coverage. The insurance we have is for $665,000; the value of the townhome is $330,000, do we need to increase the coverage to $6,000,000 or is it already covered with the $665,000.

thanks for your help

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#802614 - 08/24/07 08:04 PM Re: Force placed flood coverage banker-12
donnac Offline
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We have an outstanding loan with forced placed insurance and the lender wants to renew the loan. Am I understanding that we can NOT renew the loan with the force placed insurance on it? If the lender wants to renew the loan, the borrower must get insurance? If the borrower doesn't get the insurance then the lender can't renew the loan & should call the loan?

Thanks.

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#802621 - 08/24/07 08:11 PM Re: Force placed flood coverage donnac
David Dickinson Offline
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You are correct. You cannot make, increase, renew or extend a loan (you can't close any of these) without adequate flood insurance coverage. Tell the borrower (in more tactful words), "You want to renew this loan? Get flood insurance!".
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#803006 - 08/27/07 02:01 PM Re: Force placed flood coverage David Dickinson
donnac Offline
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Not trying to be thick headed, I just want to ensure that I understand.

Let's assume we force placed a policy on 3/1/07 & the policy expires 3/1/08. The loan comes up for renewal on 6/1/07. Can we renew this loan since the force placed insurance is good thru 3/1/08? Or are we prohibited from renewing the loan because there's force placed insurance at the time of renewal & not insurance the customer purchased?

Thanks.

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#803025 - 08/27/07 02:15 PM Re: Force placed flood coverage donnac
David Dickinson Offline
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If you have insurance coverage in place on 6/1/07, then you can renew the loan at that time - even if it's force placed insurance.

If the insurance expired on 3/1/07 and then loan was to be renewed on 5/1, you couldn't renew it without the customer purchasing insurance (not the bank force placing on 5/1).
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#803031 - 08/27/07 02:18 PM Re: Force placed flood coverage donnac
Dan Persfull Offline
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From the Mandatory Purchase Guidelines, page 37:

By enacting 42 U.S.C. 4012a(e)(2), Congress intended lenders to have clear authority to force place; under certain circumstances, they are obligated to force place. The force placement of coverage is designed for use at any time during the term of a loan in uninsured and under-insured situations; it is not intended for use at loan origination. If a borrower refuses to obtain flood coverage as a condition of obtaining a loan, the loan is deficient and is not to be made.


Renewing a loan is a tripwire for flood insurance, including the mandatory notice to the borrower. In your situation the borrower has not obtained flood insurance as required. You have a force placed policy and it cannot be used for an origination.
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#803034 - 08/27/07 02:19 PM Re: Force placed flood coverage David Dickinson
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But the other question is why would you want to renew a loan for a customer that is in technical default on the original loan?
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#803087 - 08/27/07 03:05 PM Re: Force placed flood coverage rlcarey
donnac Offline
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Please be patient with me.

If I read David's post correctly, he indicates I CAN renew the loan because there's insurance in effect, even though it's force placed insurance.

If I read Dan's post correctly, he indicates I CANNOT renew the loan even though there's a force placed policy in effect.

I guess I'm still confused whether or not we can renew the loan with the force placed insurance that is already in effect? (Not force placing a new policy at renewal.)

As for renewing the loan when the customer is in technical default, I agree but the lenders sometimes see things differently.

Thanks.

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#803094 - 08/27/07 03:08 PM Re: Force placed flood coverage rlcarey
Dan Persfull Offline
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Quote:
If you have insurance coverage in place on 6/1/07, then you can renew the loan at that time - even if it's force placed insurance.


I'm not sure I would agree with this David. You are renewing the loan which requires you to send the notice to the borrower informing them they are in a SFHA and that they must obtain flood insurance as a condition of closing the loan. In this situation they have not obtained insurance. The bank has force placed it and force placement is not to be used to originate/close a loan.
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#803099 - 08/27/07 03:11 PM Re: Force placed flood coverage donnac
John Burnett Offline
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OK. Whether David or Dan is correct about renewing a loan on which force-placed coverage is in place, I'll repeat Randy's question: Why would you? Consider it from the borrower perspective, if that helps. Unless things have changed, force-placed coverage is a good deal more expensive than borrower-purchased insurance. Unless the bank is not passing along the cost of the force-placed coverage, why would the borrower want to renew with the more expensive coverage in place?

From a practical perspective, if your bank continues allowing this borrower to renew when the bank has force-placed coverage in effect, you're perverting the purpose of force-placed coverage.
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#803205 - 08/27/07 05:00 PM Re: Force placed flood coverage John Burnett
rlcarey Online
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While not whole-hearted on this one, I'm probably leaning to more on Dan's side on this one. The Mandatory Guidelines do state:

By enacting 42 U.S.C. 4012a(e)(2), Congress intended lenders to have clear authority to force place; under certain circumstances, they are obligated to force place. The force placement of coverage is designed for use at any time during the term of a loan in uninsured and under-insured situations; it is not intended for use at loan origination. If a borrower refuses to obtain flood coverage as a condition of obtaining a loan, the loan is deficient and is not to be made.

While this deals with orginations, I'm not too sure that the same would not be considered true for renewals.

Unless there is something else out there - it might be a toss-up.
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#804664 - 08/29/07 01:52 PM Re: Force placed flood coverage rlcarey
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Can anyone tell me if the examiners are citing banks over this issue...more specifically, being cited for renewing an exisitng commercial line of credit with existing force-placed flood insurance?
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#804686 - 08/29/07 02:11 PM Re: Force placed flood coverage TINKerBell
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Flood issues are a hot button for examiners. I recently started at this institution and we had software errors that resulted in exam violations. (Which the loan officers should have caught but didn't) I would say you don't want to find out the hard way.

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#804699 - 08/29/07 02:19 PM Re: Force placed flood coverage trail hiker
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I know that Flood is a hot topic, yet our recent FRB exam just concluded with no mention of this specific area of concern (in fact we had no flood issues), which is why I want to know if other banks were being cited for this issue?
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#804732 - 08/29/07 02:48 PM Re: Force placed flood coverage TINKerBell
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I know of no banks that have been cited for this issue, however one does not readily know what all the flood CMPs being handed down consist of either. Your examiner may not have caught the fact your policies were forced placed policies or he/she does not believe, as I do, that it would be a violation. However, I would not rely on the opinion of a field examiner for something so volatile. I would want at a minimum the blessing from the Regional Office of the applicable regulatory authority. Your next examiner may take a different stance on the issue.

When you renew a loan, you are IMO originating a new transaction, and as I said earlier the renewal of a loan is a tripwire that puts all the requirements of the flood regulation in motion again. And if the borrower refuses to obtain flood insurance after the appropriate notice you are not to make the loan and you will not convince me that renewing a loan is not making a loan agreement.
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#804838 - 08/29/07 03:27 PM Re: Force placed flood coverage Dan Persfull
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Thanks Dan! You have been most helpful, as usual!
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#805571 - 08/30/07 01:48 AM Re: Force placed flood coverage TINKerBell
David Dickinson Offline
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Flood insurance is purchased for a term of 1 year. If the insurance was force placed on 3/1/07 (to expire on 3/1/08) and the loan comes up for renewal on 6/1/07, you have insurance in place. You can't buy another policy on this same property. It's already in place. I agree that renewing a loan is a trip wire, but the insurance is in place, what do you need?
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